Is RIM Riding on the Edge?

This fall, Research in Motion (RIM) is launching an armada of new smartphone devices based on its BlackBerry 7 operating system — 147 launches with 90 carriers in 30 countries — in a big bet that it can reverse an ongoing slide in market share.

Once so popular among corporate customers that its products were dubbed “CrackBerry” by addicted users, RIM has lost significant ground since the launch of Apple’s iPhone and Google’s Android-based devices. In fact, experts at Wharton say that the Canadian firm’s recent slump in market share and earnings may not be reversible. “This is a dangerous period for RIM,” says David Hsu, a management professor at Wharton. “The company has to renew itself” to avoid being overtaken by its rivals, “and that’s not an easy thing to do.”

This month, a Forrester Research survey revealed that BlackBerry has 42% of the market among smartphone-toting information workers, but Apple and Android combined have 48%. In addition, 81% of those information workers cited e-mail as their primary work application, according to Forrester. That bodes ill for RIM, which at one time set the standard for e-mail features on smartphones. “There’s nothing RIM can point to where it has a distinct advantage,” says Peter Fader, a marketing professor at Wharton and a BlackBerry customer. “At this point, people are staying with their BlackBerry devices for the wrong reason: inertia. Customers aren’t excited about the products.”

“RIM had a killer app — corporate e-mail. What created its distinct value was the security that it provided relative to what one would have on a more open system,” says Wharton management professor Dan Levinthal. “In the world before app stores with thousands of apps to download on your smartphone, that was a winning proposition. However, as the app stores of Apple and Android/Google got more appealing, the market starting tilting.”

One of RIM’s biggest problems is that it is being hit by “consumerization,” or the growing use of consumer technologies in the workplace. “RIM is getting swept up in the trend of consumer devices driving the adoption of mobile platforms in the enterprise,” says Kendall Whitehouse, director of new media at Wharton. “RIM may have all the inroads to corporate IT managers, but if everyone is walking in the door with an iPhone, none of that matters.” According to Forrester, 48% of workers pick a phone without considering what their companies support, and only 23% are given smartphones by their companies. And a recent survey by Nielsen reveals that in August, 56% of smartphone buyers chose an Android device, followed by an iPhone at 28%. BlackBerry devices were chosen by 9%.

RIM’s key figures show the strain. On September 15, the company reported net income of $319 million for the second quarter, down from $797 million a year ago. Revenue in the same quarter was down 15% from a year ago to $4.2 billion. The company shipped 10.6 million BlackBerry smartphones during that period, after promising to ship 11 million to 12.5 million three months earlier. It also shipped 200,000 of its newly launched PlayBook tablet devices — half of what Wall Street expected. Speaking on a conference call, RIM co-CEO Jim Balsillie said that the company’s older products didn’t sell well, and new BlackBerry devices were launched too late in the quarter to boost sales meaningfully.

In recent quarters, RIM has relied on growth in Asia, but the company has seen global sales slow ahead of the recent rollout of its BlackBerry 7 devices. Sales outside of the U.S., U.K. and Canada represent 56% of RIM’s revenue. RIM’s global smartphone market share in the second quarter was 11.7%, down from 18.7% a year ago, according to research firm Gartner. Android market share was 43.4% in the quarter, up from 17.2% a year ago, and Apple’s share was 18.2%, up from 14.1% a year ago.

“With new [BlackBerry 7] smartphones that already are available in North American channels, and with more to come this quarter, we believe we are well positioned to take advantage of the upcoming holiday season,” said Balsillie. For fiscal 2012, RIM projected adjusted earnings toward the low end of $5.25 to $6 a share. On March 24, RIM had told Wall Street to expect annual earnings of $7.50 a share.

‘Seize the Reins’

The company’s troubles have sparked intense scrutiny. On September 6, RIM shareholder Jaguar Financial urged the company’s board of directors to “seize the reins” at the company. “The status quo is not acceptable; the company cannot sit still. It is time for transformational change,” said Jaguar in a letter to the board. “While its rivals have demonstrated an ability to develop and market products with features that inspire consumer enthusiasm and drive higher adoption rates, RIM has clearly fallen short. Its failure to offer products with innovative features, combined with its limited selection of applications, has resulted in RIM losing market share to its competitors.”

Hsu largely agrees with Jaguar’s assessment. “RIM never thought about being a platform,” says Hsu. “RIM is a pioneer in the real-time push e-mail service, but faces the same problem as all technology oriented companies: It had to cannibalize [existing products with new ones]. It’s unclear whether RIM has the ability to look ahead.”

Fader says he wonders if RIM was merely lucky in its heyday. The company built a large installed base because it had the push e-mail field to itself. “A lot of success is about being in the right place at the right time,” he says. “RIM was the only player for a time, but it wasn’t equipped for a competitive market.”

Analysts have also questioned RIM’s management structure. The joint CEO position, which RIM has had since its inception, can be a handicap in the long run because it muddles decision making, says Wharton management professor Lawrence Hrebiniak. “It might work in the short term. When things are going well, none of this is questioned. When RIM was dominant, it could have had five CEOs and been fine.” RIM co-CEOs Balsillie and Mike Lazaridis have defended the company’s structure and say replacing them would only derail a turnaround.

Another reason why RIM is so heavily scrutinized is that the company’s hype surrounding its recent product launches hasn’t matched the reality. Its PlayBook tablet is one example: The device was described by Balsillie as “really quite magical for the consumer and the enterprise,” and yet it never took off in either arena. Over the years, RIM has heavily promoted new devices, “super apps” to spur software developers, and BlackBerry OS 6, which quickly gave way to the next version of the operating system. The problem, according to Wharton faculty, is that the company is increasingly reliant on product home runs. However, that strategy can backfire if the products fail to live up to the publicity surrounding them. “The danger is that RIM becomes the boy who cried wolf,” says Hrebiniak.

Whitehouse notes that RIM’s promotion of forthcoming products is part of an effort to keep its base of customers engaged. “I understand the pressure they are under to communicate that RIM is making progress and new features are coming in order to retain their current customers,” he says. Fader is less charitable. “Chronic overpromising and under-delivering is a sign that management can’t get its act together,” says Fader. “From the outside looking in, it just looks like chaos.”

‘A Great Deal of Value Left’

Given the level of criticism facing RIM, Hsu says he “wouldn’t be surprised to see a shake-up” at the company, but it is unclear what a restructuring would entail.

Hrebiniak suggests that, as a starting point, RIM could hire one CEO who is responsible for marketing as well as technology. Today, Balsillie is in charge of sales and marketing, and Lazaridis oversees technology and development. “The board could look for one strong CEO inside or outside the company to develop a turnaround strategy,” he says. “A lot of time, a change gets analysts on your side.”

But Fader isn’t so sure. “Cleaning house won’t do much now. So much damage has already been done to the brand. The best hope would be to sell out to a stronger player.” Kevin Werbach, a Wharton legal studies and business ethics professor, agrees that a takeover of RIM is one possible way to keep the company moving forward. “RIM pioneered mobile e-mail, but that market has been subsumed by smartphone platforms. Relationships beyond mobile and developer adoption are critical to success in the new environment,” he says. “There is a great deal of value left in RIM. It’s just hard to imagine a scenario in which it’s still the growth company that its management envisions.”

For the near term, however, “RIM has to keep its base and stick to its knitting with a measured and structured approach,” says Hrebiniak, adding that the company should start with persuading existing customers to upgrade to new devices. Whitehouse agrees, suggesting that incremental product upgrades and improvements — as opposed to launching overhyped “home runs” — could keep many enterprise customers in the fold. “Trying to out-Apple Apple is futile. But RIM could be good enough at providing corporate solutions to remain viable in that market.” If RIM can accomplish that goal, it will maintain its current market share and possibly poach customers in the future, especially if Apple or Google stumble.

And RIM may have a reasonable chance at keeping existing customers. A recent Morgan Stanley survey of 1,852 cell phone users found that 46% of U.S. BlackBerry owners plan to upgrade in the next six months. Sixty percent of that group says they plan to buy a BlackBerry 7 device. The survey also reveals that 7% of existing Android owners plan an upgrade to BlackBerry 7, and 5% of current iPhone owners will follow suit.

According to Levinthal, a bolder strategy could also be in order: RIM could ultimately decide to drop software or hardware. Since RIM’s biggest advantage is its secure e-mail system, “one possible out for RIM is to untether its e-mail functionality from the physical device,” he says. “Could you provide a RIM ‘app’ for an Apple or Android phone? This would also free RIM from the tremendous expense of developing next generation physical products which are likely to do poorly in the marketplace.”

One potential boon on the horizon for RIM is that wireless carriers have indicated the need for a third mobile platform (beyond Apple’s iOS and Google’s Android). Speaking at a Goldman Sachs investment conference on September 21, Verizon CEO Lowell McAdam noted that in terms of contenders, “Microsoft is a possibility. RIM is a possibility. And I think that over the next 12 months … you will start to see one emerge as a legitimate third [wireless] ecosystem.”

But Fader says that it’s more likely that a new player would become the third mobile platform. Werbach is betting on Microsoft and places RIM in an underdog role. “RIM simply doesn’t have the assets to catch up to Apple, Google’s Android and Microsoft/Nokia,” he says. “For example, Apple controls the cutting-edge hardware supply chain and iTunes. Google can give away its mobile OS and link it to other services. And Microsoft has the massive Windows cash cow. Developers can only support so many platforms.”

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